MINUTES OF THE SEPTEMBER 17, 2012, GENERAL EMPLOYEES' PENSION BOARD MEETING Present: Vice Chair Gretchen Schneider, Secretary Pamela Nadalini, Treasurer Christopher Lyons, Trustee Ryan Chapdelain and Trustee Barry Keeler Absent: Chair Cheri Potts, Trustee Others Present: Attorney Scott Christiansen, Pension Plans Administrator Wendy Clutter and Pension Analyst Gail Loeffler CALL THE MEETING TO ORDER Vice Chair Schneider called the meeting to order at 8:30 a.m. PUBLIC INPUT - 3 Minute Limit None. APPROVAL OF THE AUGUST 20, 2012 GENERAL EMPLOYEES' PENSION BOARD MINUTES Trustee Chapdelain stated that on Page 1 the Minutes should reflect that Trustee Keeler seconded the motion to approve the Minutes of June 18, 2012. Vice Chair Schneider stated that on Page 4 under Other Matters that the first sentence should read that Chair Potts would not be attending September 17" meeting, not September 27". On a motion of Trustee Keeler and a second by Trustee Chapdelain, it was moved to approve the minutes of August 20, 2012 with the corrections. Motion passed unanimously. RETIREMENT REQUEST OF DANNY VINCENT Ms. Clutter stated that an Application for Retirement has been received from Danny Vincent. Mr. Vincent is 56 years 3 months of age, is requesting a retirement date of January 22, 2013, and has chosen the Lump Sum Option. On motion of Treasurer Lyons, second of Secretary Nadalini, it was moved to approve the retirement request of Danny Vincent. Motion carried unanimously. INVESTMENT REVIEW = RENAISSANCE INVESTMENT MANAGEMENT International Equity Portfolio Michael Schroer, Managing Partner, Chief Investment Officer, came forward to provide an investment review of the International Equity Strategy and the Large Cap Growth Strategy for the Plan, and began by providing a firm overview as of June 30, 2012 and discussed the investment process and portfolio objectives. Mr. Schroer continued that Brazil and China are in fairly good financial positions; that the Euro zone will take longer to get growth rates back up to a sustainable path; that there is no direct exposure in the portfolio to the nations of Portugal, Ireland, Italy, Greece and Spain (PIIGS); that the portfolio is somewhat underweight in financial stocks due to the risk overseas of many banking institutions; that there is a cap of not more than 30% of the portfolio in emerging September 17, 2012 1 markets, and the portfolio is close to the 30% limit; that emerging markets is seen as the best combination of good growth opportunities and very good valuations. Mr. Schroer stated that year-to-date through June 30, 2012, the International Equity Portfolio was up 5.4% (Net) compared to the two comparable foreign indices that are up 3.0%; that year- to-date through August 31, 2012 the portfolio was at 6.6% (Net) and through August 17 was up 11.6%. Treasurer Lyons requested that future reports also show returns on a fiscal year basis. Large Cap Growth Portfolio Mr. Schroer stated that the portfolio is in full compliance with the investment Policy Statement and that the firm has not changed its discipline, but rather the market is coming back into the discipline of the portfolio; that market volatility is much lower this year and it is giving the firm more opportunities. Mr. Schroer indicated that the portfolio is more heavily weighted in Information Technology and in Consumer Discretionary funds, Health Care, and Utilities. Mr. Schroer stated that staying with the discipline has started to pay off. Mr. Schroer reported that returns have improved and year-to-date through June 30, 2012, the portfolio was up 9.4% (Net), as compared to the Russell 1000 Growth index of 10.1%; that year- to-date through August 31, 2012 the portfolio was up 14.7% as compared to the Russell 1000 Growth index of 14.6%; that quarter-to-date the portfolio was up 9% VS. the index of 7.8%; that year-to-date the portfolio was 19.1% VS. an 18.1% index; that the fiscal year beginning September 30, 2011 through last Friday the portfolio was up 34.1% compared to the index at 30.6%. Mr. Schroer reviewed the performance of the firm since 1999 and explained the period of underperformance related to the market and the economy as relates to the discipline of the portfolio. INVESTMENT REVIEW - LORD ABBETT Charles Hofer, Partner, Lord Abbett Client Portfolio Manager, came forward to address the Board. Mr. Hofer stated that he received a call last week indicating that the Board was considering a change in managers and he was offered an opportunity to speak before the Board. He stated that an investment report was emailed to Trustees, but today he would like to have a conversation with the Board concerning his firm and its relationship with the Board; that Lord Abbett has enjoyed a relationship with the Board for over 11 years. Mr. Hofer stated that he realizes the Board has a responsibility to make tough decisions and has certain expectations of managers; that Lord Abbett has disappointed the Board over the past few years and the firm has also been disappointed in its returns. Mr. Hofer asked that the Board consider the qualitative and quantitative decisions that must be made with regard to Lord Abbett; that the Board must decide if performance has met the expectations of the Board, and realizes that recently it has not; that as a firm, the people, resources, philosophy, and process is not broken; that the firm has been in existence since 1929, is independent, privately owned, and the only thing the firm does is active investment management; that the service provided is performance, and the firm takes that responsibility very seriously. Mr. Hofer reviewed the market environment for the past several years and explained the effect on earnings due to unusual events of the financial crisis in 2008, followed by the Great Recession and the financial crisis in Europe; that those events dominated performance where the market sentiment moved negatively and the companies that had more favorable valuations and fundamentals were sold in mass; that the marketplace was consumed by those events; that 2 it was that sentiment that moved investors away from equities to fixed income; that now there is an environment where the economy and companies are continuing to prosper; that there are times when all active managers will underperform and the recent time period is where Lord Abbett underperformed; that the underperformance has created sizeable in-point sensitivity; that looking back over 1 year and 3 years, the performance is not acceptable, but it is a function of underperformance in two specific quarters where the market moved to a risk-off defensive orientation; this quarter is the opposite and risk is on. The market has rewarded the companies that Lord Abbett tends to own and is favoring companies on the basis of valuation and fundamentals; that he believes the reward will ultimately be there and there is every expectation that this will be the case again; that the macro and global political issues that are still concerning everyone will desist. Mr. Hofer asked that no decision be made on the basis of short term performance, which the Firm apologizes for, and stated that Lord Abbett will continue to work as it has in the past and appreciates the Board's consideration of the circumstances that led to the underperformance; that long term the strategies have worked very well. At the request of Treasurer Lyons, Mr. Hofer explained the performance slides shown in the portfolio report. Mr. Hofer expressed appreciation for the opportunity to speak and thanked the Board for their business. DISCUSSION Re: ASSUMED RATE. OF INVESTMENT RETURN Attorney Christiansen stated that many Trustees were at the City Commission Workshop, or may have listened to the discussion, that centered around all three of the City pension plans; that what came out of the conversation was that the City Commission became aware that it could not direct the Pension Boards to take an action; that the City Commission could put a request to the Boards by means of a Resolution. Attorney Christiansen continued that in his presentation he wanted to make clear to the City Commissioners that they were differing with the consultant's evaluation of the situation and what should be done; that one other thing made clear to them was that if the plan continued with its current rate of return, or perhaps not as low as the City Commission recommended, that the City could fund the plan by putting in additional money to cover any risk it believed was not in the actuarial valuation each year; that the City Commission has that ability to contribute more money; that he believed it was a constructive workshop on behalf of all three of the Plans. Treasurer Lyons stated that Attomey Christiansen's comment that the City Commission differed with the Board's advisors required further explanation in view of the Minutes account of Charlie Mulfinger's comments. Attorney Christiansen responded that it appeared that the Commission City looked at it differently than the advisor in that they believe that there may be more of a risk there than Mr. Mulfinger's analysis. Trustee Chapdelain stated that it was his belief that Mr. Mulfinger suggested that if changes were made that it should be over a period of time in small increments. Discussion ensued concerning whether the rate of return is presently based on net or gross of expenses and investment fees as stated in the Resolution, and was advised that it was net of investment fees. Commissioner Turner came forward and stated that there is an inconsistent way in which the three Boards define the basis of the rate of return and the purpose of the language in the Resolution is to make it consistent for all Boards. Attorney Christiansen asked for clarification if it was the City Commission's intent that the rate of return be based on net of investment related expenses or all expenses of the Plan? Commissioner Turner stated that it is the intent of the City Commission to use the same method that the Firefighter Plan uses. 3 Secretary Nadalini posed the question that if the Pension Boards do not agree with drastically reducing the assumption rate, what is the position of the City to contribute an additional amount as an option? Secretary Nadalini continued by stating that it was confirmed by the attorneys to all three Boards that it is legal for the City to contribute an additional amount. Commissioner Turner stated that the Resolution is a request from the City Commission to the Boards to consider the lower rate; that he believes adding another reserve fund is awkward and will not allow the City to restate its balance sheet to reflect the larger unfunded liability that is coming through as the lower rate; that the sense of City Commission is that it is a clear way to communicate with the electorate that a lower rate would be better from the City Commission perspective; that it is very clear that the City Commission has no authority; that the Commission City recommended setting a lower rate to protect the plan, which is beneficial to the Plan member; that it also shows fiscal responsibility, and does not have any negative consequences from a portfolio management point of view; that rating agencies prefer to see an entity deal aggressively with their liability for costs and benefits rather than avoid dealing with it. Treasurer Lyons stated that he agrees wholeheartedly with Commissioner Turner's comments about the rating agencies; that the City just went through a rating review and was asked by the rating agency about the economy in Sarasota and what the City has done to mitigate pension costs and Other Post Employment Benefit costs; that the rating agency was very concerned about the lack of interest on the part of the City Commission to raise the millage rate to solve some of the funding problems and deal with fund balances; that he hopes the City's rating does not drop. Treasurer Lyons continued that it is a City Commission decision of whether to fund the Pension Plans above the assumption rate is not his decision; that the City has funding issues and the City Commission will have to deal with them on a long temm basis. Treasurer Lyons corrected Commissioner Turner's comment about recording the unfunded liability on a balance sheet, and stated that it will become a moot point because the Government Accounting Standards Board (GASB) has issued a new pronouncement that basically states that the computation of liability will be totally different than the actuarial reports computed now and will require a two-fold computation. Secretary Nadalini stated that clearly the Trustees have read the Resolution, but from the Board's side of table if it decides to follow the suggestion of the City Commission to lower the rate of retum to 7%, where is the money coming from? She continued that while not trying to make this a political issue, but having the request of the Resolution to consider, it is only fair for the Board to know what would be the impact of that decision if the Board follows the request to lower to 7%; that if the Board does not follow the recommendation stated in the Resolution, the City Commission can still make a decision to contribute more money to the Plan since lowering the rate requires al higher contribution. Commissioner Turner stated that eventually the City will have to fund a significant shortfall and the most efficient way is to have a lower portfolio assumption rate and start funding it earlier; that ultimately it will be funded by tax increases; that to put off funding this for 5, 6, or 7 the size of shortfall will potentially be unmanageable and the City needs to start funding years this now; that rating agencies are looking at it and the most effective way to do it is through the existing mechanisms and higher funding at a lower portfolio rate; that deferring funding of the Pension Plans will resuit in much higher taxes in 10 years and moderately lower if it starts now. Treasurer Lyons stated that the City is facing long term funding issues whether there is a lower rate or not; that a lower rate could be set and if markets recover the rate could be adjusted again. 4 Vice Chair Schneider stated that perhaps the change could occur in a more measured way as has been discussed by lowering the rate to 7% over time. She continued that a sudden large jump creates an obligation for taxpayers and the City immediately, and questioned why try to fix it all in one fell swoop? Commissioner Turner stated that the City Commission recommended 7% then 6.5% for the next year; that he believes 5% is the right number; that the City needs a faster approach; that the Board reduced the rate from 8.3% to 8% and he believes it needs adjustment more quickly. Commissioner Turner questions where is the harm to members to lowering the rate; that there is no consequence to management of the portfolio and it just ensures Plan members are protected. Treasurer Lyons stated that the City Commission is asking the Boards to lower the rate of return, SO what harm it to the plan to keep it safe and what is at stake to keep it going at a faster rate? Secretary Nadalini stated that she understands a need to lower the rate; that it is difficult not to consider what it might do to the City financially and realizing what potentially couid happen; that the current City Commission may not be in existence in the next couple of years, and a future City Commission may not opt to create a higher tax rate and may decide to lay off more employees instead; that it is realized it is not the Board's problem as fiduciaries, but there is a concern of the potential of that happening by a City Commission who may not feel the same way. Secretary Nadalini stated that she agrees the Board should take into consideration lowering the rate as planned, but based on prudent evidence and advice on what should be done; that she is comfortable with perhaps lowering the rate to 7.5% but would not support anything below 7% at this time; that consideration must be given to the impact it would have on employees as well as taxpayers; that the City has the ability to contribute more and if lowered to 7.5% the City could contribute more to make up the difference. Trustee Chapdelain stated that he enjoys serving on the Board and the independence of the Board. He stated that there is some awkwardness serving as a Trustee and also being an employee of the City with respect to the proposed draft Resolution presented by the City Commission; that he has reviewed the Minutes of previous meetings and the testimony of Board experts, advisors, and consultants who are on record for supporting lowering the rate of return over a period of time; that advisors mentioned at the City Commission Workshop that the City has the ability to prefund the Plan if desired and the City Commission legally has that option; that it is difficult to ignore the testimony of the impact that a sudden lowering could have on the City and taxpayers; that he believes lowering the rate of return all the way to 7% in one year is too drastic. Vice Chair Schneider asked for clarification as to whether this topic will come back to the Board if the Resolution is adopted by the City Commission, or was it the intent to vote on the request in the Resolution today? Discussion ensued and it was agreed that the City Commission will not consider the Resolution until its evening meeting today, and ultimately it may be amended at the meeting or not approved at all. Secretary Nadalini stated that City Commission members expressed similar concerns as Commissioner Turner in this regard, and there was consensus that bringing this issue to the Board's attention in the form of a Resolution would allow citizens and employees to speak on the Resolution at the City Commission meeting. Consensus was reached to ask the actuary and consultant to be present at the October 15, 2012 meeting for discussion by the Board. Secretary Nadalini suggested that an educational workshop be held annually as an update to the City Commission on the State of the Pensions Plans;that it would be an excellent venue and 5 opportunity to engage in dialogue with Commissioners and City administration and should be held on a regular basis. Trustee Keeler stated that there is concern that employees have no way to be a part of a pension-related meeting in an afternoon session due to work responsibilities; that perhaps consideration should be given to holding such meetings in the evening; that employees are concerned and need to have an appropriate venue to provide input. Secretary Nadalini stated that she expected to see more Directors and employees at the City Commission Workshop, and agreed that holding meetings after work hours might be in order; that making a State of Pension meeting a little broader for the sake of employees might also be appropriate, as the recent Workshop was very specific. Secretary Nadalini continued that the City Commission inviting pension officials to come forward was meaningful. Attorney Christiansen reminded Trustees that the focus of the Workshop was about the assumed rate of return and not benefits. Trustee Keeler requested that the General Employees' Pension Plan Annual Meeting be held at a time where there could be more employee participation. Trustee Schneider agreed that with the Annual Meetings being scheduled during the lunch hour that it is not convenient for many employees to attend. She suggested that the Annual Meeting have educational components to it and hold it after hours once a year. Attorney Christiansen suggested that the actuary discuss what the present 8% assumption rate consists of with regard to an inflation assumption and real investment return; that the should actuary explain thoroughly to the Board the relationship between the two factors; that the actuary should also elaborate on the assumption rate as it relates to factoring in expenses and investment fees. Trustee Chapdelain suggested that investment policy and sources of other investments also be discussed with Mr. Mulfinger in a future Board meeting. OTHER MATTERS Pension Administrator Clutter stated that there is a need for updated actuarial tables due to changes to the Plan in applying Cost-of-Living adjustments, computing optional forms of benefits, and mortality tables; that there will be a cost associated with obtaining the new tables. Secretary Nadalini stated that she would like more information concerning the costs involved. ADJOURN The meeting was adjourned at 10:05 a.m. OTHER INFORMATION None. Vice Chair Gretchen Schneider Secretary Pamela Nadalini 6